Archive for the 'Financing' Category

If Your Duplex Buyer Can’t Find A Bank, Be One

said on March 18th, 2010 categorized under: Financing

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moneyLet’s face it. Due to foreclosures, short sales, job losses and tightened lending standards, fewer prospective duplex buyers can qualify for loans.

Ultimately, this translates to fewer potential buyers for properties, which contributes to declines in value.

Months and months ago I predicted we’d see the re-emergence of the contract for deed as a financing option. In recent days and weeks, I’ve begun to see just exactly that.

A contract for deed, which is sometimes called a land contract, is a means of financing a property in which the seller becomes the bank.

Of course, acting as the bank for a buyer carries inherent risks and rewards for a seller.

Benefits include:

  • A much faster sale, as there’s no waiting for mortgage underwriting or loans to be funded.
  • A way for a seller to simply get out of a property
  • A way to ultimately be paid more for the duplex than a traditional sale would offer, in that the seller would be earning interest as part of the payments.
  • Less stringent foreclosure laws which allow the seller to regain all rights to the property within 60 days of default, while keeping any of the monies from the payments or sale.
  • A way for an investor to spread capital gains tax over a period of years, thereby allowing for more comprehensive tax planning and savings.
  • The monthly payments may ultimately result in greater cash flow than was available to the seller as a landlord, without the headaches of maintenance and vacancies.
  • A balloon payment two, three or five years in the future, which allows the seller to retain the balance of their equity in a lump sum.

The risks of carrying a contract for deed can be:

  • Having to foreclose on the property, thereby being forced to manage and/or sell it all over again.
  • Having to make repairs after the foreclosure
  • Buyers may not have enough of a down payment to cover seller’s closing costs, resulting in the seller having to go into their pockets to pay the difference
  • Triggering a due-on-sale clause with your mortgage company.

Having weighed both the benefits and liabilities, many traditional sellers are finding a contract for deed to be a way to solve the problem of being stuck in a property they no longer care to own.

Congress Threatens To Require Higher FHA Down Payments

said on March 12th, 2010 categorized under: Financing

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piggy bank elderly fullOnce upon a time, way back in 2005 and 2006, you could buy a duplex with no money down.

Then the housing crisis happened. And in an effort to make sure buyers had more at stake, banks decided they would only give loans to investors with 20 to 25 percent down, or owner occupants who qualified for FHA insured financing and had three percent for a down payment.

Then the Federal Housing Administration decided they would only insure loans of owner occupants who had 3.5 percent for a down payment.

Fair enough. That increase didn’t deter too many borrowers.

However, according to a report in the Wall Street Journal, a bill now in Congress advocates for FHA insured loans to require a 5 percent down payment. The thinking goes that if borrowers have a bigger equity position, they are less likely to default.

While that still doesn’t seem like nearly as big of a jump as a 20 percent down payment would, FHA Commissioner David Stevens testified that slight adjustment would eliminate 40 percent of new FHA loans; the equivalent of 300,000 transactions a year.

Fewer sales would, of course, result in fewer mortgage insurance premiums being paid to FHA, which doesn’t make loans, but simply insures them. This loss of revenue, Stevens contends, would in turn put the already financially stressed institution on still shakier ground.

No word on which way Congress is leaning.  The imminent expiration of the first time and repeat home buyer tax credits, looming interest rate increases and the threat of higher down payments, however, mean now is the perfect time to buy.

Let Fannie Mae Buy You A Refrigerator

said on February 11th, 2010 categorized under: Financing

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homepath logoLast week Fannie Mae announced it is offering a 3.5 percent incentive for buyers who purchase and close on a property they own between January 28 and April 30, 2010.

Fannie Mae owned properties can be found both on the MLS and at Homepath.com.

Buyers Homepath properties  may receive up to 3.5 percent of the final sales price for:

  • Closing costs
  • The purchase of new Whirlpool appliances by Fannie Mae or
  • A mix of the two at the buyer’s discretion, up to the maximum of 3.5 percent

In order to be eligible for the incentive, offers must be accepted after January 28 and close before May 1, 2010. Investors aren’t eligible for the bonus.

HUD Flips Minneapolis Duplex Rules

said on January 21st, 2010 categorized under: Financing

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getting airEither someone at HUD is really smart, or they’re reading my blog.

I’m inclined to think it’s the former.

Last week I explained many rehabbers I work with were scrambling to find houses and duplexes to buy before the end of the month so once repairs were completed, they would have owned it the required 90 days in order to be able to resell it to an FHA buyer before the tax credit deadline.

This same waiting period often prohibited FHA insured buyers from acquiring some bank and HUD owned properties.

On Friday, HUD Secretary Shaun Donovan announced a temporary policy lifting the 90 day waiting period.

The waiver goes into effect on February 1, 2010, and is effective for one year; unless, of course, HUD changes its mind.

Sales must be “arms-length”, with no shared interest between the buyer and seller or anyone else participating in the sale. When the resale price of the duplex is more than 20 percent above what it cost the seller to acquire it, certain conditions have to be met for the waiver to apply.

This should help keep the market supplied with affordable first time home buyer properties in good condition.

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masonry constructionOne of the challenges many first time home owners face when buying a foreclosed Minneapolis duplex is the cost of repairing and deferred maintenance or damage. 

After all, when you spend your savings on the down payment and have to wait several months to get your $8000 first time home buyer tax credit check, how can you afford to make the place livable?

It’s important to remember for the last several years FHA has offered a loan called a 203k construction loan. Basically, you can get a loan for up to 110 percent of the rehabbed value of the property, with the money left after purchase being allocated for construction and repairs.

The 203k is one loan, as opposed to a first and second mortgage.

There are stipulations to these mortgages, including that the improvements must be made by licensed contractors and the bank pays those vendors directly.

Historically, these loans have typically been more expensive than a straight FHA loan: as much as 1 – 1.5 percent higher.

However, a loan officer who specializes in 203ks told me yesterday in the last several months, interest rates on them have been just .25-.85 percent higher.

That seems like a pretty affordable way to finance the repairs and updates so many of these distressed properties require.

Minneapolis Duplex Buyers Can Now Put Less Down

said on August 14th, 2009 categorized under: Financing

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declineThere was a quiet bit of good news for Minneapolis duplex buyers in the mortgage market this week.

PHH Home Loans and two of its mortgage insurance companies removed the “declining market” label from the Twin Cities.

For the last couple of years, lenders deemed a metropolitan area a “declining market” if the Federal Housing Finance Agency Home Price Index saw a slide in value of, basically, one percent or more. In other words, if the average home price drops, it’s a declining market.

Understandably, banks are reluctant to lend money on a duplex that’s going to be worth less money one year from now. As a result, if a property is in one of these markets, an appraiser may flag it as such. This has, has often resulted in owner occupant buyers who intended to use conventional financing being required to bring more money to closing table for a down payment.

This often meant a 20 percent down payment on the duplex they wanted to live in. Needless to say, this additional cash requirement was a deal breaker for many.

Big deal, right? Just use an FHA loan.

Well, remember those FHA red flags?

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FHA Wins Minneapolis Duplex Financing Wars Again

said on July 16th, 2009 categorized under: Financing

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Twenty percent. Gold. 3dIt sounds presposterous, but a client actually had a computer glitch significantly delay his purchase of a duplex the other day.

As he was using FHA financing, the glitch involved a software problem in the computer system of the federal government. Basically, he had written an offer earlier in the year on a different property, which we were unable to successfully close on.  And somehow, the “case number” assigned to the loan he never got remained in the system.

When he went to get a loan for a different property, the government’s software prevented it. After all, you can only have one FHA loan at a time. And the computer said he was applying for a second one. The computer is always right (sarcasm intended).

So I went about looking for alternatives. After all, there are no limits to the number of conventional loans a buyer can have at one time. And I hoped there was a loan product out there with perhaps a down payment of just a little more than FHA’s mandatory 3.5 percent. Perhaps we could find him a conventional loan that required just 5 percent down.

And then I learned something.

While conventional loans on single family homes presently require the buyer to have a minimum of 10 percent down, duplexes are another matter entirely.

We all know investors are required to put 20 – 25 percent down in today’s market. So it should be something less if you’re buying the duplex to live in, right?

Nope. Owner occupants who use conventional financing for their multi-family properties are required to have a 20 percent down payment.

Sadly for my client, it looks like FHA is still the best game in town.

Do You Pay More In Interest When You Buy A Duplex?

said on July 6th, 2009 categorized under: Financing

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dollar sign with a pencilOne of the most common questions I get is, “What’s the interest rate on a duplex?”

And as I do with so many of my answers, I always begin with, “It depends”.

If you plan to live in the duplex, your interest rate will be exactly the same as it would be if you were buying a single family home to live in.

However, if you’re purchasing the property strictly as an investment, your interest rate will be anywhere from one to three percent higher.

If, for example, the going rate is five percent on single family homes, expect to pay anywhere from six to nine percent interest on an investment property.

Of course, the interest rate each person qualifies for is determined by a number of factors, not the least of which is credit scores.

Comments Off on How Much Should You Put Down On A Minneapolis Duplex Contract for Deed?

House and Money with Pad of Paper and PenWith today’s tightened lending standards, many investors are having a difficult time finding financing. As a result, the contract for deed has once again emerged as a viable option.

I have had two buyers ask me this week alone to find them property where the seller is willing to do the financing.

Believe it or not,  there are properties on the MLS right now where this is an option. Many sellers, for whatever reason, simply need to no longer have the managerial responsibilities of a property.

Of course, the seller also wants to make money on his duplex.

While most forms of seller financing carry a higher than market interest rate, they often also require less of a down payment. At the moment, most banks are requiring a down payment of 25 percent on a non owner-occupied investment property. Private sellers willing to carry financing will often ask for less.

How much less?

Let’s look at it from the seller’s perspective.

If his duplex is actively on the MLS, he has signed a contract with a real estate broker. In the event the property sells as a result of his Realtor’s efforts, he is legally bound to pay a commission based on a percentage of the sales price.

So, if he’s bound to pay six or seven percent in commission on say a $200,000 property, that’s $12,000-$14,000.

In that case, is he going to be ok with a buyer putting $5000 down?

Probably not. If he did, he would have to go into his own pocket to pay not only the rest of the commission, but closing fees as well.

What’s the likelihood of finding a seller willing to do this?

You tell me.

Comments Off on Translation: How To Get The $8000 Tax Credit For Closing Costs

legal mumbo-jumboEvery time HUD makes a change in the first time home buyer tax credit, they announce it by issuing something called a mortgagee letter. These edicts announce the framework of whatever change may be in order.

On May 29, HUD’s mortgagee letter announced the $8000 first time home buyer tax credit may be used for closing costs or to add to the minimum down payment required for an FHA loan of 3.5 percent. And it explained how to get it.

That is if you can translate the mumbo jumbo.

No?

Let me try.

There are two ways to get the $8000 tax credit applied toward closing costs, prepaids, discount points or, yes, even the down payment.

First, you can get a tax credit advance from an approved non-profit agency. These agencies, which may be government or non-profit organizations, must be approved for the program by the federal government and may, in fact, allow you to use the tax credit as part of the 3.5 percent down payment. 

There are currently 10 states where such programs exist: Colorado, Delaware, Idaho, Kentucky, Missouri, New Jersey, New Mexico, Ohio, Pennsylvania and Tennessee.

While we don’t have such a program in Minnesota, I imagine “getting” the credit as a down payment will involve applying at one of the agencies providing this service prior to even shopping for a duplex.

The buyer will then receive the credit at closing. Repayment will be secured by the agency placing a lien on the buyer’s new duplex. This lien, or loan, may be “soft” or require monthly payments, which can’t start for at least 36 months. The amount of these future payments will be factored along with the first mortgage, in the buyer’s qualifying ratios.

More likely for most first time Minneapolis duplex buyers is a second scenario.

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